The Bank of Italy has released its €-Coin indicator for July. It continues its fall in negative territory at -0.50 (against -0.37 for June). The €-coin indicator developed by the Bank of Italy provides a summary index of the current economic situation in the euro area. The indicator is an estimate of quarterly GDP growth shorn of the most erratic components (seasonal variations, measurement errors and short-run volatility). It collates data from a large set of macroeconomic time series (industrial production indices, business surveys, demand indicators, stock market indices and more), anticipating Eurostat’s official release of the area- wide GDP growth figure by several months. It also provides a forecast of the quarterly growth rate net of the more volatile components (Readers interested in the underlying methodology can download the related paper). As can be seen on the main chart above, the €-Coin tracks quite well the evolution of the area-wide GDP. If anything it tends to underestimate large GDP dropouts such as those occurring during the GFC and in 1Q 2020.
The reading of the €-Coin indicator contrasts with the Composite PMI for the Eurozone which shows a strong rebound in economic activity in July. Indeed, the IHS Markit Eurozone PMI Composite Output Index maintained its recent upward trend rising by over six points on the month to a reach a level of 54.9. That compared to June’s 48.5.
The €-Coin and the PIMI readings for July should be read in the context of a free fall in GDP in 2Q 2020 across the Eurozone as can be read in Eurostat’s first estimation of the figure, released a few days ago. You can watch my comment on French GDP in 2Q 2020 for the News Channel France 24 English. The worst in terms of headline growth figures might well be behind for the Eurozone, but Q1-Q2 figures were the consequences of an unprecedented exogenous shock.The long-lasting impact of the COVID-19 pandemic on the level of unemployment and on potential growth in the Eurozone is what really matters. And the jury is still out on this question. The reading of the €-Coin indicator for July – we will scrutinise with care the figures for August and September – and the resurgence of COVID-19 infections here and there across the European Continent bode ill for the shape of the recovery.
A strengthening euro in the face of weakening dollar is another headwind for the Area and another headache for the ECB which officially does not target exchange rates (although the EURUSD level is a key gauge the ECB considers along other indicators in order to adapt its policy and to fulfil its policy mandate). Similarly to the collapse in the second quarter, the expected rebound of consumption and business activity in 3Q 2020 – on a q-o-q basis – is largely mechanical. The more important figure is the year-over-year change. In this regard, despite the encouraging hard data coming from France and despite the considerable improvement in soft data, GDP for 3Q 2020 will still most likely be below its 3Q 2019 level.
